Wall Street bets on companies by buying theirstock . It bets
against them by shorting theirshares .
A short seller borrowsshares , sells them and waits for the
price to go down. When it does, the shares are repurchased at a
lower price than they were sold for. The trader pockets the
difference and returns the borrowed shares.
Everything in the financial world can be measured, andshort
selling is no different. The "short ratio" is calculated by
dividing the number of shares that have been shorted by thestock
's average daily tradingvolume . The short ratio is the number of
days it would take for all the investors who have shorted the
shares to buy back or "cover" their short positions. The higher
the ratio, the more themarket expects the stock to tumble.
The average short ratio for an S&P 500 company is 3.4,
which means it would take four trading days for all the short
positions to be closed.
Here are the S&Pstocks with the highest short ratios:
M&T Bank (
has $63.6 billion in assets but a low Tier 1capital ratio of
7.5%. Shares have gained nearly 3% for theyear , about a fourth
of what the S&P has managed, andWall Street is expecting more
trouble. The bank has the highest short-interest ratio in the
S&P 500. Among its major shareholders:Warren Buffett 's
Berkshire Hathaway (NYSE: BRK-A)
, with a 6.1% stake worth $400 million.
The New York Times Co. (
has seen its sharesgain 75% in the past six months, a run-up that
investors are betting the stock just can't sustain. The iconic
newspaper's circulation remains well above 1 million copies a
day, but other properties are struggling. Overall spending on
newspaper advertising is projected to drop 18.7% thisyear .
Quest Diagnostics (
surprised Wall Street, coming in above expectations. Three
executives clearly voiced their own expectations for the stock,
too: They all exercised options to buy shares, then resold them
for an $11 millionprofit . When executives -- including theCEO --
aren't willing to keep theirwealth tied up in the stock, it's
hard to make a case for an exceedingly bright future for the
Iron Mountain (
protects information and stores documents. Itsrevenue isn't
growing particularly fast, and thenet margin isn't anything to
write home about. And yet the shares are trading at nearly 50
timesearnings and are within shouting distance of a52-week high .
Investors are betting that these shares really aren't twice as
valuable as Apple's. Good bet.
Sears Holdings (Nasdaq: SHLD)
ought to be chopping tall cotton: Surely shoppers are drawn to
the store for its low prices, right? Wrong. The company, which
also includes Kmart, has seenrevenue drop for the past two years
and earnings diminish to the point where they are nearly
invisible to the naked eye (a $1.5 billionprofit in 2006 has
shrunk to $53 million). It's curious why the shares are up 80%
for the year versus the S&P's 11.3%gain .
Leggett & Platt (
makes furniture materials and automotive components, both tough
businesses in a downeconomy . As the economy has spiraled
downward, Leggett's ability to produce revenue has waned, and
profits have been uncertain. Profit fell more than -50% in the
second quarter, and the company has cut its expectations for the
year and seen its shares downgraded byanalysts . That makes LEG
stock, trading at a richer valuation than either Apple or Google,
a very tempting short.
The trash business, my dad is fond of saying, is picking up.
So is the future for
Waste Management (NYSE: WMI)
as far as I can tell. It's the incumbent trash hauler in scores
of cities. Earnings have been on the rise the past few years and
it's trading at a reasonable valuation. The company is buying
back shares, which it sees asundervalued . This begs the question
of what happens to a short seller if a stock goes up instead of
down? Answer: He losesmoney by being forced to buy back the
shares he borrowed at a higher price than he sold for.
is a drug maker with a history of major revenue growth but
troublesome execution evidenced by inconsistent profits. Net
losses of $1.3 billion for the past two years substantially
overshadowed the $400 million in profits in the previous two
years. In themean time, itsdebt has increased +612%. Mylan's new
president and chief operating officer may be causing some
investors to bet the new leadership won't be able to hang onto
the stock's +40% gain since Jan. 1.
shares have seen a scorching advance since Jan. 1, rising nearly
+100%. With the auto business on lifesupport and the economy
still soft, it's clear that many on Wall Street don't think
theCash for Clunkers program can heal the industry. Shorts are
skeptics: They don't see any reason to pay 22 times earnings for
a company that has traded at roughly half that valuation for the
past two years.
CMS Energy (CMS)
is a utility in Michigan. It's another example of a company that
has seen somegains that investors apparently don't think itwill
be able to hold on to. From an earnings standpoint, that's not a
bad guess with this company. It grows revenue each year like
clockwork, but has posted heavy losses in three of the past four
What's the reason moststocks get shorted? Gravity. Traders who
witness a great rise tend to expect a great fall, especially when
the stock's rise is a significantmultiple to themarket
Just for comparison's sake, some of the companies with the
lowest short ratio areinvestment bank
Goldman Sachs (GS)
, which recently paid back its TARPfunds and posted a record
quarterly profit. Another is bailed-out insurance giant
American International Group (AIG)
, which is basically a government entity.
Bank of America (BAC)
has the lowest short-interest ratio in the S&P, just 0.28
days. Does that mean BofA is a buy? You bet your boots it